copyright 2011 pearson canada inc. 3 - 1 chapter 3 what is money?
TRANSCRIPT
Copyright 2011 Pearson Canada Inc. 3 - 1
Chapter 3
What Is Money?
Copyright 2011 Pearson Canada Inc. 3 - 2
Meaning of Money• Money - anything that is generally accepted in
payment for goods or services or in the repayment of debts; a stock concept
• Wealth - the total collection of pieces of property that serve to store value
• Income - flow of earnings per unit of time
Copyright 2011 Pearson Canada Inc. 3 - 3
Functions of Money
• Medium of Exchange - promotes economic efficiency by minimizing the time spent in exchanging goods and services
• Unit of Account - used to measure value in the economy
• Store of Value - used to save purchasing power; most liquid of all assets but loses value during inflation
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Functions of Money I
• If money is not unique as a store of value, why do people hold money?
– The answer is liquidity, the relative ease and speed which an asset can be converted into a medium of exchange.
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Evolution of the Payments System• Commodity Money• Fiat Money• Cheques• Electronic Payment• E-Money
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Measuring Money I • Float – funds in transit between the time a
cheque is deposited and the time the payment is settled.
• Measures of Money Supply:– M2– M3– M2+
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Measuring Money II
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Money as a Weighted Aggregate
• The Bank of Canada’s money supply measures are ‘simple-sum’ indices, the indexM = x1 + x2 + … + xn ,Where xj is one of the n monetary components of the monetary aggregate M
• Weighted monetary aggregates seem to predict inflation and the business cycle somewhat better than the conventional measures
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Measuring Money
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How Reliable are the Money Data?
• Revisions are issued because:– Small depository institutions report
infrequently– Adjustments must be made for seasonal
variation
• We probably should not pay much attention to short-run movements in the money supply numbers but should be concerned only with longer-run movements.